Why CBN Is Right Not To Devalue The Naira, By Tope Adesipo

Nigerian economy is experiencing some downturns.. More than anything, it appears that high oil price, the major driver of the supposed  growth of the last 16 years, will remain a pipe dream for a longtime.


The Chinese economy has continued to experience a slowdown and financial instability while the shale oil technology has come to stay even when the continued low price makes it expensive to produce.  the revenues from Nigeria’s oil sales has witnessed a sharp decline of more than 70percent from September 2014, when the receipt was at its peak, to now with dire consequences to the federation. The crude oil sales account for over 70 percent of the total country’s revenue and more than 90 percent of Nigeria’s foreign exchange earnings.

The Central Bank of Nigeria, realizing that the reserves has been badly depleted, the bank banned 41 items from accessing foreign exchange.

Apparently, as a temporary measure until the reserves rise to a level where it can continue  to support importation of these items. The CBN has kept the official Exchange rate at N199 to a dollar but at the parallel market, it sells for as high as N300 to a dollar. Some analyst are therefore calling for further Devaluation of the naira or to  allow it to depreciate further having already lost 23% of its value since November 2014. However, as usual of solutions thrown up by these  analyst, what seems to be a solution throws up another crisis if not worse. It becomes a vicious cycle.

The CBN opted against the third devaluation of naira since the crisis started in order not to trigger further increase in prices of commodities as Nigeria is an import-dependent economy.

Fuel which is subsidy free at the moment  is currently selling in filling stations at N86.50 but a further Devaluation would mean that fuel importers can not access forex at N199 and will have to do so at a higher price with the cost differentials reflected in the pump price.

Aside that, the CBN is also of the opinion that some of the items it has placed foreign exchange bans on could be produced locally. Items like Toothpick, nylon are being imported into the country from other African countries like South Africa.

Some people have cited examples of other countries to justify the need to devalue the naira. Take China for instance, When China devalued the Yuan, it was to make Chinese exports Cheap and Comptetive.  On the contrary, the devaluation of naira does not accord any balance of trade advantage on Nigeria.

The main export of Nigeria, crude oil, is denominated in dollars, which we have no control over. Nigeria is essentially an import dependent economy which imports every basic goods including refined petroleum products. Thus, the devaluation can only make goods and service expensive.

For instance, the importers of refined crude oil products would use  the devaluation of naira as reason the decrease in crude oil in the international market could not reflect at the pumps locally as the Forex differentials will have to be added to the price.

The options chosen by the CBN so far and which it has resolve to continue with after its MPC meeting  has drawn and will continue to draw the opprobrium or ire of Foreign investors  and their media collaborators  who have called for the devaluation of Naira. For instance, the Economist (London) did a scorching and condescending article title “Toothpick”  alert on the CBN sometimes.

The truth is that the majority of the foreign investments are from portfolio investors who gamble on financial assets such as government bonds, treasury bills and stocks because of the high price of crude oil.

This is unlike foreign direct investment which means an investment in the productive assets, which cannot be easily liquidated. It also explains why $8.0billion out of $11billion foreign holdings of the local debt could easily be taken out of Nigeria once there was a decline in oil revenue.

When the former administration of Goodluck Jonathan and his Prime Minister Okonjo Iweala were  celebrating that Nigeria is the Number one investment destination in Africa, it was the hot bet on high Crude oil money that was being celebrated.

An example is, between January 2013 and June 2015 over 80% of the capital importation to Nigerian economy put at $47.4bn, according to figures released in August 2015 by the National Bureau of Statistics (NBS), was portfolio investment. That was the reason  the so called Investment has not created jobs.

Worse still, in the case of the bonds and treasury bills, the government borrowed  at high cost – Nigeria’s bonds,  have one of the highest yields in the world – without anything to show for it in term of infrastructure development back home here.

Why there appears not to be any easy way out of this Crisis yet,  the options chosen by the CBN is still the best for now.

As the  weakening of the our local Currency here will puts us in more woes.